Bank of France Governor Christian Noyer addresses the International Economic Forum of the Americas in Montreal, Quebec June 11, 2012. REUTERS/Christinne Muschi

In an unprecedented move, the ECB earlier this month cut the euro zone’s key interest rate to a record low of 0.75 percent and lowered the rate it pays banks for overnight deposits to zero to help revive lending and growth.

But Noyer was quoted as saying on Monday that such changes had little effect on banks’ funding costs.

“What we see is that we have a clear problem of transmission of monetary policy. In the eyes of the markets, the interest rate charged to individual banks depends on the funding costs of the sovereign and not on the rates set by the central bank.”

“This means that the monetary policy transmission does not work. We tried to counter this phenomenon which is unacceptable for a central bank in a monetary union,” Noyer said.

To ease banks’ funding strains, the ECB has pumped more than 1 trillion euros into the banking system in the form of 3-year loans since December, but Noyer said the ECB could not keep such support measures in place indefinitely.

“For the future we cannot indefinitely rely on a system where the central bank is massively funding the banking system and massively receiving liquidity on the other side of its balance sheet,” he said.

“It cannot be such an intermediary in the long run.”

Asked whether there would be another 3-year tender, he said: “For the time being we don’t see the need, but we will see. I do not exclude it, but at the moment it does not seem to be needed.”

Noyer, who is also the head of the French central bank, called instead for a deeper integration of the euro zone’s banking system to help solve the debt crisis and said a special fund could pave the way for a deposit guarantee scheme.

“For the time being, the way to do it for me would be to set up a euro zone fund as a sort of reinsurance fund,” Noyer said, adding the fund would back national deposit guarantee schemes, intervene if needed and would get its money back later. It would be funded by banks.

“After one or two decades we could make a step to a simpler system, but that would be in a much more federalized euro zone.”

SUPERVISORY ROLE

Euro zone leaders agreed last month to bend their aid rules to shore up banks and bring down borrowing costs of stricken debtors like Italy and Spain, as well as to form a single supervisory body for the bloc’s banks, housed under the ECB.

Noyer said that in its new role, the ECB would work closely with national supervisors, but it would need to create a separate supervisory committee next to the ECB’s Governing Council to avoid a conflict of interest.

“The ECB would be the centre, where policies are decided,” he said. “The decisions would be taken in a centralized way so that there would clearly be a federal institution able to dictate what is being done. But the day-to-day supervision would be done in the national central banks/supervisors,” he said.

All banks should be subject to the new supervisory structure, Noyer added, as it would otherwise be “meaningless”.

Noyer said he rejected calls for higher inflation as a way to reduce debt levels, saying more inflation fuelled consumers’ and investors’ fear that they would lose purchasing power. They would cut spending and the effect on growth would be negative.

“The second effect: people would expect the value of the euro to go down, that would immediately increase our borrowing costs,” Noyer said. (Reporting by Eva Kuehnen; Editing by Robin Pomeroy)